Europe’s peripheral banks are suffering large deposit losses as capital moves to safer nations. Figure 2 shows the enormous capital flight that is occurring through the banking sector across the euro area. These Target2 balances show a cumulative transfer of €440 billion from peripheral nations to Germany from early 2009 to October 2011. Were it not for these implicit bailouts through the payments system, the euro area would have already collapsed.

At the least, we expect several more sovereign defaults and multiple further crises to plague Europe in the next several years. There is simply too much debt, and adjustment programs are too slow to prevent it. But this prediction implies that the long-term social costs, including unemployment and recessions rather than growth, attributable to this currency union are serious. Sometimes it is easier to make these adjustments through flexible exchange rates, and we certainly would have seen more rapid recovery if peripheral nations had the leeway to use exchange rates.

When we combine multiple years of stagnation with leveraged financial institutions and nervous financial markets, a rapid shift from low-level crisis to collapse is very plausible. European leaders could take measures to reduce this risk (through further actions on sovereign debt restructurings, more aggressive economic adjustment, and increased bailout funds). However, so far, there is little political will to take these necessary measures. Europe’s economy remains, therefore, in a dangerous state.

In a BBC interview, Ms Lagarde said now was the time to act in order to avoid a 1930s-style depression. She said: "Looking at it from this perspective, 2012 must be a year of healing. But as Hippocrates put it long ago: 'Healing is a matter of time, but it is sometimes also a matter of opportunity.'

"And today, it has to be an opportunity of our own making. Otherwise, we could easily slide into a 1930s moment. A moment where trust and co-operation break down and countries turn inward. A moment, ultimately, leading to a downward spiral that could engulf the entire world."

I wonder if the Germans know this is money printing via the back door. It's just cash for trash. The collateral rules are watered down and much of it is government guaranteed, which is all very circular in a Ponzi-schemey sort of way.

“February’s second three-year Long Term Refinancing Operation looks set to be extremely large,” Credit Suisse Group AG analysts led by William Porter wrote in a report to clients. “The last LTRO has removed any stigma, making managements who do not exploit the value on offer arguably careless at best.”

The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up and funding from U.S. money markets dries up. Politicians, including French President Nicolas Sarkozy, are pushing the banks to use the loans, which carry an interest rate of 1 percent, to buy higher-yielding southern European sovereign debt, thereby forcing down borrowing costs in the region.

Aliber got his first clue that the craze spelled disaster from a former student living in Beijing. The young Chicago alumnus told Aliber that he'd just moved into an apartment building with several hundred units, and was the only one living there. Investors had bought all the other apartments that hadn't sold.

Later that year, Aliber visited the office of an upscale developer in Beijing, who was getting $600,000 for 1100 square foot units with bare walls. The folks doing the purchasing were earning between $20,000 and $30,000. Given those modest incomes, it was obvious that the buyers weren't purchasing an affordable new residence, but speculating in real estate, either to live there for awhile then flip the unit, or simply leave it vacant while seeking a buyer willing to hand them quick windfall.

What amazed Aliber was the chasm between the prices of the apartments and the rents they fetched. A typical $600,000 unit brought a landlord less than $1000 a month in rent after expenses (assuming no mortgage). It wasn't the rental yields that attracted investors, it was the huge price appreciation, averaging from 20% to 30% from 2008 until last year.

So how far do China's prices need to fall so that the cost of owning is reasonably close to the level of rents? Aliber reckons that the rental yield on apartments will eventually go from less than 2% to 5%, or even a bit higher.

The rental yield is simply the annual rent divided by the market price, just as the yield on a bond is the fixed interest payment divided by the price of the bond that day. In the U.S., the rental yield averages around 6%, meaning the multiple of prices to rents is around 17. The adjustment to a 5% rental yield in China would push prices down by 60%.

5. The subsidy for private equity - William Cohan comments at Bloomberg that American private equity investors, who pay 15% capital gains tax, are getting a big public subsidy from regular taxpayers who pay 35% on their income tax. It's all very topical given Mitt Romney's past life as head of Bain & Co and his vast wealth, which he hasn't been that keen to disclose tax records on.

Cohan has a point about the public subsidy.. A really big one.

Just imagine how much bigger his point would be if he was talking about an economy with no capital gains tax. Like New Zealand's. The same argument applies for debt funded private equity and property investment here.

The real reason the tax loophole for private equity mavens must be closed once and for all is that American taxpayers subsidize the private-equity industry -- and its outsize paychecks -- and simple fairness demands that they don’t also get an additional break in the form of lower tax rates.

Mitt Romney, the co-founder of Bain Capital LLC and the leading contender for the Republican presidential nomination, got blindingly rich because of this taxpayer subsidy, and it isn’t right that he and his cohort can also pay taxes at a 20- percentage-point discount compared with the rest of us.

Here is how the subsidy works: The Internal Revenue Service allows for the tax-deductibility of interest expense on corporate debt. Since corporate debt is the mother’s milk of a leveraged buyout, there would be no private-equity/LBO industry without this huge tax benefit. Indeed, anyone who has used an Excel spreadsheet to model a leveraged-buyout -- you know who you are! -- knows that the magic of the entire industry depends almost solely on the interest-expense provision in the tax code.

By loading up a company with debt and then deducting the resulting interest expense, tax payments are generally wiped out, allowing the remaining “free cash flow” to be used to pay down the debt taken on to buy the company in the first place. Given that tax revenue is necessary for the government to function, this means the rest of us provide a subsidy that allows the private-equity firms to thrive.

The latest government census shows 178 million Chinese were over 60 in 2009. That figure could reach 437 million -- one third of the population -- by 2050, the United Nations forecasts. While the elderly were looked after in the past by their children, urbanization and the nation’s one-child policy have eroded the tradition of family care.

“It’s a demographic tsunami,” says Joseph J. Christian, a fellow at the Asia Center at the Harvard Kennedy School, and former DLA Piper partner in Hong Kong, who specializes in senior housing issues in China. “The whole multi­generational housing model has disappeared.”

Japan’s Shadow

China’s challenge is similar to that faced by Japan in the 1990s, with one essential difference: China will grow old before it gets rich. With tens of millions of parents left to fend for themselves, the government set up a National Committee on Aging to try to devise a comprehensive strategy to ensure their health and comfort.

7. Training your replacements - The next wave of globalisation is going to hit service sectors in developed economies that have previously been immune to outsourcing to the likes of China or India.

The first batttleground we are seeing across the Tasman is in financial services. The media there is up in arms about layoffs in banking as some of the big banks outsource IT services and accounting to India.

This could come here too. It has already happened in chunks of Telecommunications (tried ringing Telecom's Philippino O18 staff lately?) and will eventually spread to the likes of IT, banking, medical services, media, insurance and legal services. The growth of the Internet is accelerating this shift.

Here's the argument, which I don't necessarily disagree with. I'm beggining to think that a good dose of money printing (and the direct buying of government bonds) may be the only sane way out of the austerity-driven foreign debt spiral that many countries are diving into.

Skidelsky says the current mantra of government debt reduction simply drives an austerity spiral with ever higher interest rates, ever higher debt/GDP ratios and ever lower employment and economic growth. He cites five fallacies of the government debt reduction mantra.

First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it. This is not true of countries in the eurozone. But their governments do not have to repay their debts, either. If their (foreign) creditors put too much pressure on them, they simply default. Default is bad. But life after default goes on much as before.

Second, deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010.

Third, the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.

Fourth, there is no connection between the size of national debt and the price that a government must pay to finance it. The interest rates that Japan, the United States, the UK, and Germany pay on their national debt are equally low, despite vast differences in their debt levels and fiscal policies.

Finally, low borrowing costs for governments do not automatically reduce the cost of capital for the private sector. After all, corporate borrowers do not borrow at the “risk-free” yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households. In fact, the causality is the reverse: the reason why government interest rates in the UK and elsewhere are so low is that interest rates for private-sector loans are so high.

As with “the specter of Communism” that haunted Europe in Karl Marx’s famous manifesto, so today “[a]ll the powers of old Europe have entered into a holy alliance to exorcise” the specter of national debt. But statesmen who aim to liquidate the debt should recall another famous specter – the specter of revolution.

It seems the shady characters are often one step ahead of the regulators. Financial repression (artificially suppressed official interest rates) also have a habit of forcing money underground and creating bubbles around the fringes. Sound familiar?

Twas ever thus.

The full story is well worth a read. Here's a sample:

Beijing's bans are a way of life for financiers constantly looking for the loopholes in China's tightly-controlled credit markets.

"Trust firms really know how to live with harsh regulation -- when one thing is banned, they can quickly find a new thing and make it big before regulators notice it," Li Yang, the chief analyst for Use Trust, a trust-focused consultancy in Chinese city of Nanchang, told Reuters.

Trust firms raise private capital fund vehicles, typically from high net worth individuals, working hand-in-hand with banks to find investors and distribute products. Their emergence has been particularly appealing to China's big state-backed lenders who can use trust products to put deposits to work off-balance sheet, bending rather than breaking the rules on strict lending limits laid down by Beijing.

The seemingly-permanent shortage of official bank loans for the small firms that generate around 80 percent of the jobs in China, as well as negative real interest rates on bank deposits, has generated soaring demand for trust products.Annual yields of 9 percent versus bank deposit rates of 3.5 percent and inflation that averaged 5.4 percent in 2011 have tempted a wide range of investors, even those who struggle to meet minimum investment rules of millions of yuan, designed to keep the general public out of the often risky enterprises.

Regulators fear a return to the experience of the late 1980s, when at the industry's peak China had more than 1,000 trust firms and a host of investment-fed asset bubbles, moral hazards and systemic risks that ultimately led to, at the time, the biggest bankruptcy in Chinese history.

10. Totally Stephen Colbert making fun of Super PACs, the slush funds being used to buy elections in America.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

If BH is bashing away at the awful nasty lack of a CGT and how a CGT would make everything so much better....it's because BH has failed to understand the game is all about staying in power long enough to run the rorts and scams to fill the pot before the other lot have a go wallowing in the pig trough.
BH actually believes govt is about governing in the best interests of all Kiwi...it isn't. Give him time and he will see the light. I think JK believes that too.
Sadly the truth is the country belongs to the banks. In private Shearer will be told in very clear language...don't mess with the property sector bubbles, nor the banks right to farm New Zealand.

Les
Yes, re #8 he has ignored the 'external' effects of currency debasement which is fine if you are the US, UK or Europe or in ther case of Japan endlessly borrow from your xenophobic citizenry, but if a smaller economy tried this they would be gutted, we have alredy seen this with Greece

Bernard
But they have already been gutted by the bond market which has in no uncertain terms said austerity or we will break you, yes in theory we have our own currency but it is traded disproportionately (something i think should be curbed )and therefore valued externally, the chances of us getting away with money printing are nil

Bernard,
No #8 you do realise you are saying in effect that government deficits don't matter? and that they can just borrow their way out of the GFC by creating more debt? What??? Can you name me any government in history who solved its problems in the end by debasing its currency?

Beware what you wish for with Capital Gains Tax , there must also be deductions for Capital losses , and in the US the mortgage costs on your home are tax deductable.
The truth about CGT is that it is a helluva complex tax to manage and police , and it costs a lot to collect , often it works out uneconomc for the revenue authorities to manage .

There is no wonder why prices are high in New Zealand. Our economy isn’t balanced, but one sided not diverse enough. As a consequence dominant industry sectors cause high prices – e.g. agriculture products and real estate become increasingly unaffordable for Kiwis.

http://en.wikipedia.org/wiki/Monopolistic_competition
In a monopolistically competitive market, firms can behave like monopolies in the short run, including by using market power to generate profit. In the long run, however, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like a perfectly competitive one where firms cannot gain economic profit. In practice, however, if consumer rationality/innovativeness is low and heuristics are preferred, monopolistic competition can fall into natural monopoly, even in the complete absence of government intervention.

Mist42nz - it all depends how an economy is structured. As my links explain certain sectors of industries are not good contributors and of course low wages are often the consequences. I explained many times how this could be improved.
What is even worse here in New Zealand is the fact, that on average public servants earn more then the people working in the private sector.

Agree Boatman CGT is a can of worms, good for lawyers and accountants. Also, a bear run on sharemarkets could leave a hole in the Govt's finances. A more steady source of revenue, simple to implement and collect, is a land tax on unimproved value.This would be a good proxy for a tax on capital gains in land values. It would also be impossible to avoid. Progressive economies like Singapore and Hong Kong feature this tax, and it doesnt seem to do them any harm.
Further, it forces land to be used productively. It will drive down the price of land so that new entrants in agriculture can get their foot in the door, and should reduce the price of residential land as well. Neville Bennett has been advocating this for years, citing the historical pedigree of Adam Smith, J.S.Mill, Ricardo, Bentham, and Henry George, not forgetting Lloyd George and Winston Churchill. To me it seems logically sound, morally sound, efficient and effective. The only thing against it is VESTED INTERESTS. Perhaps they need to be overcome.

Duh !!! You are obviously misinformed about the reason for CGT in Singapore and HongKong (there is none in HK by the way)....Price/Income ration in HK and Singapore is in the range of 10's...it makes NZ prices look decent.
The reason CGT was imposed in Singapore was because of public anger and not economics. (ie it's a political measure to appease public discontent) It cannot be so as the Goverments of both Singapore and HK is the largest landowner and depends on Land sale revenues for their budget expenses. (much like Chinese Local Goverments)

European bureaucrats and politicians (Lagarde etc) are so funny.
The depression warning is an oblique reference to the causes of WW2,so she is scaremongering ,if you don't take our medicine you will get Adolf back!
At the same time they are printing money like they never heard of the Weimar Republic,something the Germans don't like! And the economic and moral collapse of that republic was one of the reasons old Adolf was able to come to power.Item 3 above.
Lagarde warns us not to be inward looking and protectionist ,yet we should be protective of our jobs.......note Item 7 above.
And finally the people who do have a prescription for all this madness ,ie small government,no debt,personal responsibility are the very ones evryone seems to want to make fun of Item 6 cartoon.of Newt.

yeah I agree the implied references to 30s Nazism is scaremongering, rather than anything substantive. That doesn't mean that there won't be some real issues around social stability etc. though if the problems aren't suficiently resolved

John Key is very relaxed, in the face of a lot of serious issues. Maybe thats a good way to be?
All us here worrying about these things, what does that achieve?
Of course I 'm being tongue in cheek. He SHOULD be worried, not in a panic sense, but in the sense that there ARE some things that can be done to improve our resilience to things going pear shaped internationally. Maybe he is and thats just him projecting a calm and confident public persona.
Me? I'm off to the 4th test later this arvo to catch a couple of hours in the sun with a coopers in hand

"which I don't necessarily disagree with".
I do. Printing money without destroying at least the same amount of debt is stealing. You'd be agreeing with bailing out the ones writing an taking out unbacked debt, or with the intention to not pay it back or to pay it back with devalued money. Naked shorting the currency. All paid for by ordinary people without debt or with ordinary income and paying taxes. It is absurd to think nobody gets the bill when you print money, outright or by lending withou paying back.
The only sane solution is default on debt which can not be repaid. The loss should be on the ones writing and taking on the debt. Why is this so hard, this lesson has been learned many times in history. Sigh.

"Here is how the subsidy works: The Internal Revenue Service allows for the tax-deductibility of interest expense on corporate debt. Since corporate debt is the mother’s milk of a leveraged buyout, there would be no private-equity/LBO industry without this huge tax benefit."So take away the tax deductibilty for interest then. Duh. Yes the finance sector will shrink and release resources for more productive uses.

If debt doesn't matter, then drop the tax rate to 1% or less, and lets print away. Why tax citizens when you can just print. Why should we work, to pay the government something it can get for free? Either debt does matter, and we need taxes, or if it doesn't matter then we don't need taxes. Think.

Absurd. Money is created at no cost by central banks, and regional banks, society is built upon the faith that the money is valuable. The banks stop printing money for society, causing it to collapse, meanwhile they still create pleanty, and pass it round between themselves in a circular reference, and give a tiny bit to govt, which in keeping up the farce, tells the citizens to be thankful they are getting any at all. When in fact by paying taxes, they are the only part of the monetary system that gives real value to money. If nobody had to pay taxes, the money would have no value.

Maybe this was a good system, aside from the fact that fiat currencies have a life expectancy of 40 years, maybe it illustrates the simple truth that nothing changes, people never learn. The longer it takes for a reset, the more time I have to get physical assets. Print away, destroy those savings accounts, wages, and shares, a nice quick burst, get us talking about quadrillions instead of mere trillions.

The farce goes on....
"The central bank has drawn encouragement from pledges by political leaders to turn Europe into a low-debt economy, enforced by a fiscal treaty that finance ministers said is on track to be signed in March. "http://www.bloomberg.com/news/2012-01-24/eu-calls-for-more-bondholder-concessions-as-greece-seen-going-off-track-.html
This is the central bank that is currently breaking EU law by financing state debt using banks as the 'middlemen'....and the politicians who helped make the mess in the first place by breaking the EU fiscal rules...they are promising to be prudent....to "turn Europe into a low debt economy"....do you believe this shite.Put yourself in the place of a family in the EU...one that has accumulated capital by honest means and bloody hard work for 60 years and in many cases for hundreds of years...would you still have your wealth in a bank in the EU?...would you be buying state bonds of any member country bar Germany?....Or would you already be sleeping better knowing your wealth that can be made liquid is now safe in a vault in Switzerland in the form of gold bars and gold coins...too bloody right mate.

Wolly,
The Swiss parliment passsed a law - at the request of the banks - that the banks can just pay back gold deposits with cash instead of the actual gold - if you had gold I wouldn't have it in a bank, its no more secure than the bank or even less...better to hold it in a fulled backed EFT or actual gold in the ground (mining shares) or better still in a vault outside the banking system..

Anyone had a look at the Baltic Dry index lately.
The chart has fallen off a cliff.http://www.bloomberg.com/apps/...
For some reason I'm feeling a but more bearish today! Must be the huge coronal hole
bearing down on us earthlings!

A sickening sight PPP....wait for it...this'll be deemed to be a sure sign that recovery is just round the corner....kick the can again....the numbers are into the "run for your life" phase.
Meanwhile in the herald I read...
"The department is one of the few that has received a bigger budget since the National-led administration took the government benches in 2008 and started clamping down on public spending."
hahaaaaahaaaaa...clampdown BS more like

I have to agree with Mich, that printing money is stealing. That is why counterfeiting is illegal. There are lots of arguments for and against printing money based on the consequences, but the fundamental issue is a moral issue.

Mish details why the ECB actions are set to make the debt crisis a bloody sight worse.http://globaleconomicanalysis.blogspot.com/
Maybe the market hasn't seen the Baltic Dry....if so then all hell will break when it does...

"I had been trying to wrap my head around what happened with the Occupy Movement since the Department of Homeland Security coordinated destruction of most of the encampments around the country in November. The corporate mainstream media immediately moved onto more pressing issues like the Kim Kardashian divorce and Jessica Simpson's weight gain. The American public has been instructed by the media the Occupy story is history, just like the BP oil spill, the Fukushima nuclear meltdown, and the Egyptian revolution. In a society consumed by reality TV Occupy Wall Street was just another show. The credulous American populace dutifully turned their attention to Black Friday and whipping out one of their 15 credit cards to purchase remote control pillows, 3D 72 inch HDTVs, a see through tank top from the Snooki line of slutware, or thousands of other ludicrous Chinese crap churned out by slave labor in factories built to support the “efficiency” efforts of U.S. conglomerates."http://www.marketoracle.co.uk/Article32761.html